1 — The Concept and Functions of Money

Part A — Foundations of Money and Early Exchange

Money is one of the most significant inventions in human history, serving as both an economic instrument and a social technology. Its emergence allowed humans to transcend the limitations of barter, enabling complex trade, measurement of value, and accumulation of wealth.

Core Functions of Money

  1. Medium of Exchange
    • Money facilitates transactions by eliminating the inefficiencies of barter.
    • Enables indirect exchange, so goods and services can be traded without requiring a double coincidence of wants.
  2. Unit of Account
    • Provides a standard measure to compare the value of different goods and services.
    • Essential for pricing, accounting, and financial planning.
  3. Store of Value
    • Maintains purchasing power over time, allowing wealth to be saved and deferred.
    • Its effectiveness depends on stability and public confidence in its value.
  4. Standard of Deferred Payment
    • Supports credit systems by allowing future payments to be agreed upon in a commonly recognised medium.

Theoretical Perspectives

  • Classical Economics (Smith, 1776/1999)
    • Money evolved naturally to solve the inefficiencies of barter.
    • Barter → commonly accepted medium → early forms of money.
  • Modern Economic Theory (Keynes, 1930; Menger, 1892; Ingham, 2004)
    • Emphasises the institutional and social dimensions of money.
    • Recognises both state-driven and organic origins.
  • Anthropological View (Polanyi, 1957; Graeber, 2011)
    • Barter was rare in early societies.
    • Exchange embedded in social obligations, reciprocity, and redistribution systems.

Significance of Money

  • Serves as both a practical economic tool and a social construct.
  • Relies on trust, authority, and cultural acceptance.
  • Provides the foundation for later developments: commodity money, coinage, banking, paper money, digital finance, and AI-driven monetary systems.

References

  • Graeber, D. (2011). Debt: The First 5,000 Years. Brooklyn: Melville House.
  • Ingham, G. (2004). The Nature of Money. Cambridge: Polity Press.
  • Keynes, J. M. (1930). A Treatise on Money. London: Macmillan.
  • Menger, C. (1892). ‘On the Origin of Money’. Economic Journal, 2(6), 239–255.
  • Polanyi, K. (1957). The Great Transformation. Boston: Beacon Press.
  • Smith, A. (1776/1999). The Wealth of Nations. London: Penguin Classics.
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